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HomeMy WebLinkAboutWater Rates Analysis Report - 6/6/2007p�PLLEY qR�� � O,L A 1 Yf: 00NDED 19 Town of Oro Valley Water Utility Commission Water Rates Analysis Report June 6, 2007 TOWN OF ORO VALLEY WATER UTILITY COMMISSION WATER RATES ANALYSIS REPORT JUNE 69 2007 ORO VALLEY TOWN COUNCIL Paul Loomis, Mayor Helen Dankwerth, Vice Mayor Paula Abbott, Council Member K.C. Carter, Council Member Barry Gillaspie, Council Member Al Kunisch, Council Member Terry Parish, Council Member ORO VALLEY WATER UTILITY COMMISSION Dave Powell, Chair Winston Tustison, Vice Chair George Calabro, Member Brent Egbert, Member John Hoffmann, Member Elizabeth Shapiro, Member Harold Vaubel, Member TOWN STAFF David Andrews, Town Manager Jerene Watson, Assistant Town Manager Philip C. Saletta, P.E., Water Utility Director Shirley Seng, Water Utility Administrator TABLE OF CONTENTS SECTION TITLE PAGE List of Acronyms i Index of Appendices 11 Executive Summary 1 Introduction 3 Enterprise Fund 4 Alternative Water Resource Development Impact Fee Fund 6 Potable Water System Development Impact Fee Fund 8 Preferred Financial Scenario 9 Recommendation on Water Rates, Fees & Charges 11 Alternate Financial Scenario 13 Conclusion 14 Appendices LIST OF ACRONYMS LIST OF ACRONYMS USED IN THIS REPORT AF Acre Feet AWRDIF Alternative Water Resource Development Impact Fee AWWA American Water Works Association CAGRD Central Arizona Groundwater Replenishment District CAP Central Arizona Pro j ect COLA Cost Of Living Allowance CY Calendar Year EDU Equivalent Dwelling Unit FTE Full Time Employee FY Fiscal Year GPCD Gallons Per Capita Per Day GPF Groundwater Preservation Fee LTS Long Term Storage Credits O&M Operating and Maintenance PWSDIF Potable Water System Development Impact Fee WIFA Water Infrastructure Finance Authority INDEX OF APPENDICES APPENDIX A. Opinion on Rates Analysis Red Oak Consulting B. Assumptions for Preferred Financial Scenario B-1 Enterprise Fund B-3 Alternative Water Resource Development Impact Fee Fund B-4 Potable Water System Development Impact Fee Fund C. Preferred Financial Scenario C-1 Enterprise Fund JC-3 Alternative Water Resource Development Impact Fee Fund C-4 Potable Water System Development Impact Fee Fund GS Summary of all Funds JD. Rate Schedules &Tables for Bill Comparisons for Preferred Financial Scenario D-1 Potable Water Rates D-2 Reclaimed Water Rates D-3 Tables for Bill Comparisons by Meter Size E. Alternate Financial Scenario E-1 Assumptions for Alternate Financial Scenario E-5 Proforma: Enterprise Fund E-7 Proforma: Alternative Water Resource Development Impact Fee Fund E-8 Proforma: Potable Water System Development Impact Fee Fund E-9 Proforma: Summary of all Funds E-11 Water Rate Schedules for Alternate Financial Scenario E-13 Table for Bill Comparisons by Meter Size for Alternate Financial Scenario III TOWN OF ORO VALLEY WATER UTILITY COMMISSION WATER RATES ANALYSIS REPORT I JUNE 6, 2007 EXECUTIVE SUMMARY The functions and duties of the Oro Valley Water Utility Commission include reviewing and developing recommendations for water revenue requirements, water rates and fee structures. The Commission annually evaluates staff recommendations based on a rates analysis to assure the recommendations meet Town policies and bond covenants. The Utility has based its financial analysis on the American Water Works Association (AWWA) Cash Needs Approach. The AWWA is the largest national organization that develops water and wastewater policies, specifications and rate setting guidelines accepted by both government -owned and private water and wastewater utilities worldwide. This Water Rates Analysis Report contains detailed information on the three funds that comprise the Oro Valley Water Utility: • Enterprise Fund • Alternative Water Resource Development Impact Fee Fund • Potable Water System Development Impact Fee Fund Each fund is individually analyzed with regard to revenue and revenue requirements. The Preferred Financial Scenario includes five year projections for each fund. This allows the Utility to evaluate the impact of future costs and the revenue sources that will be required to meet those costs. Based on the data contained within the Preferred Financial Scenario, the Water Utility Commission has made recommendations on water rates and impact fees that the Utility will assess in FY 2007-08. Those recommendations are as follows: • Restructure the existing 3-Tier rate design to a 4-Tier rate design for the potable water rates. • The base rates remain the same for both the potable and reclaimed water rates with the exception of the 8 inch meter. The base rate for the 8 inch meter is proposed to decrease from $1,325.00 to $1,060.00. This reduction is so base rates for all meter sizes conform to generally accepted rate setting practices. • The commodity rates for the existing 3 tiers remain the same for both the potable and reclaimed water rates. • Establish the 41h tier commodity rate at $5.00 per 1,000 gallons. -1- • The water use contained within each tier is proposed to decrease to further encourage water conservation. • The construction water rate will increase from $4.76 to $6.00 per 1,000 gallons and will be $1.00 greater than the highest tiered rate. • Increase the Groundwater Preservation Fee by $0.15, from $0.25 to $0.40 per 1,000 gallons for the potable water customers. • Increase the Groundwater Preservation Fee by $0.04, from $0.21 to $0.25 per 1,000 rj gallons for the reclaimed water customers. J The Water Rates Analysis Report also includes an Alternate Financial Scenario for the Council's consideration. The Alternate Financial Scenario incorporates the same basic assumptions as the Preferred Financial Scenario; however, the revenue is generated by the existing 3-Tier rate structure with no changes in the base rates or in the amount of water contained within each tier. The Utility employed Red Oak Consulting, a division of Malcolm Pirnie, Inc., to review this Rate Analysis and provide an opinion on the reasonableness and consistency of the assumptions contained within the analysis. They verified the calculations, tested the consistency of underlying assumptions and calculation methods, and reviewed the consistency of the results with the Utility's current financial position and recent cash flow. Their professional opinion may be found in Appendix A. JThe Commission presents this Rates Analysis Report for the review and consideration of the Mayor and Council. The Commission is available to discuss this report in greater detail at a joint study session or other appropriate forum. The Oro Valley Water Utility Commission is Jproud to serve the Town of Oro Valley, it citizens and the customers of its water utility. The Commission extends their appreciation to the Mayor and Council for their consideration and guidance and looks forward to their continued direction. -2- TOWN OF ORO VALLEY WATER UTILITY COMMISSION WATER RATES ANALYSIS REPORT JUNE 69 2007 INTRODUCTION The Oro Valley Water Utility was established as a self-supporting enterprise of the Town. The Utility is comprised of three separate funds, each being established for a specific purpose: • Enterprise Fund • Alternative Water Resource Development Impact Fee Fund "� • Potable Water System Development Impact Fee Fund The Enterprise Fund is the operating fund for the Utility. Revenue for this fund includes water sales, interest income, service fees and miscellaneous charges. The expenditures managed from this fund include personnel, operations and maintenance for both potable and reclaimed water systems, capital costs for existing potable water system improvements and related debt service. The Alternative Water Resource Development Impact Fee Fund was established in 1996 to account for and manage capital expenditures related to alternative water resources including reclaimed water and Central Arizona Project (CAP) water. Expenditures include acquisition of water rights required for growth and debt service for capital costs to deliver reclaimed water and CAP water to the Town. Revenue for this fund is received from impact fees collected at the time water meters are purchased and from interest income. Additionally, the Groundwater Preservation Fees, which are collected through the Enterprise Fund, are contributed to the Alternative Water Resource Development Impact Fee Fund to assist with debt service. The Potable Water System Development Impact Fee Fund was established in 1996 to account for and manage capital expenditures related to expansion or growth -related potable water capital projects and related debt service. These projects include wells, pump stations, reservoirs and mains for the potable water system. Revenue for this fund is received from impact fees collected at the time water meters are purchased and from interest income. The revenue and expenditures of all three funds are combined primarily to determine if the Utility meets the debt service coverage requirement established in the Mayor and Council Water Policies and the 2003 Bond Covenants. Otherwise, each fund is independent with regard to revenue and expenses. The revenue from the individual funds may not be consolidated nor used for any purpose other than for which they were originally established. Each fund is addressed in more detail in the report. -3- ENTERPRISE FUND REVENUE The Enterprise Fund is projected to have a cash balance of $8 million at the beginning of FY 2007-08. Enterprise funds may be used for operating costs including personnel, operations and maintenance, capital improvements for the existing potable water system and debt service. Water sales revenues are estimated to meet the FY 2006-07 projections. Revenue - from other service fees and charges is estimated to exceed the budgeted projections by $83,400. Interest income will not meet the budgeted projections as a result of the temporary transfer of funds to the Alternative Water Resource Development Impact Fee Fund (AWRDIF). All Groundwater Preservation Fees are transferred to the AWRDIF Fund to help repay debt on the reclaimed water system and are not included in the revenue comparison of the Enterprise Fund. The following table provides the Utility's budgeted revenue compared to the estimated revenue for FY 2006-07: Revenue Source FY 2006-2007 Budget FY 2006-2007 Estimated Difference Increase (Decrease) Water Sales S 1096589500 S 1096759300 S 169800 Service Fees/Charges S 4679500 S 5509900 S 839400 Interest Income S 3009000 S 2009000 ($1009000) Total S 1194269000 $ 1194269200 $ 200 Revenues projected for FY 2007-08 were based on anticipated annual growth in the customer base of 320 single family residential customers and water consumption patterns similar to calendar year (CY) 2006. The following table indicates the amount of water sales revenue that would be realized with the existing rate structure and no water rate increase: FY 2006-2007 Revenue Estimate FY 2007-2008 Revenue Projection Difference Increase (Decrease) $1096759300 $109825,190 $1499890 Under the existing rate structure, the projected revenue increase would be received from growth. In 2006, the single family residential gallons per capita per day (GPCD) water use declined by 2 GPCD to 106 GPCD. This reduction in water use should have minimal impact on future water revenues. REVENUE REQUIREMENTS Because of the timing of the preparation of this report relative to the Town's budgeting process, the Commission recognizes that both the projected revenues and the projected expenses may need to be revised. The amounts shown below and used in the financial analysis may differ slightly from those included in the Department Budget Request and the Manager's Budget Review because of the availability of more recent and reliable information. The Commission understands that Oro Valley Water Utility Staff, the Town -4- Manager and the Mayor and Council will adjust expenses to fit the final estimate of revenues based on the action of Council on the rate structure for FY 2007-08. The following table is a comparative summary of operating expenses for the Water Utility Enterprise Fund. Budgeted amounts for FY 2006-07 are compared to the projected expenses for FY 2007-08 used in the financial analysis: OVWU Expenditures FY 2006-2007 Budget FY 2007-2008 Projections Change Increase(Decrease) Personnel S 291789532 S 295599954 $ 3819422 -O&M $ 298719307 $ 396429450 $ 7719143 CAP Capital Costs $ 1519830 $ 2169405 $ 649575 CAP Recharge $ 2649500 S 2379500 ($ 279000) CAGRD $ 4299500 $ 190129000 $ 5829500 Capital Outlay S 499239000 $ 693129040 $ 193899040 Debt Service $ 397409372 S 391609766 ($ 5799606) Totals $1495599041 $1791419115 $ 295829074 Projected personnel costs include the addition of 4 full time employees (FTEs). All of the proposed FTEs would be assigned to field operations. Personnel costs also include a proposed 5%COLA increase effective at the beginning of FY 2007-08 and reclassification of six existing employees. The projected operations and maintenance costs include the O&M costs for both the potable water system and the reclaimed water system. Along with other departments within the Town, the Utility will be relocating its offices away from the Town Hall campus. Therefore, in addition to the traditional O&M costs, the projected expenses include relocation expenses for the Utility and increased office rent. With the exception of extraordinary and/or one-time expenditures, O&M costs were projected to have inflationary increases of 3 % annually. The projected increase in Central Arizona Project (CAP) water capital charges are a result of the acquisition of an additional 3,557 acre feet (AF) of CAP water. Capital repayment costs associated with the reallocation of 3,557 AF of CAP water will be included in the AWRDIF Fund and will be discussed in that section of the report. The projected decrease in CAP recharge costs is due to a decrease in the amount of water that will be recharged at the Kai Farms Groundwater Water Savings Facility. In FY 2006-07 the Utility recharged approximately 4,000 AF of CAP water. In FY 2007-08, the Utility is proposing to recharge 2,500 AF. The projected increase in costs for the Central Arizona Groundwater Replenishment District (CAGRD) is a result of the Utility's plan to minimize the amount of water that will be deducted from the Groundwater Allowance Account by reporting excess groundwater withdrawals in a greater amount than is required. The Utility will use Long Term Storage (LTS) credits to offset a portion of the costs charged by the CAGRD. This process is discussed in more detail in the 2007 Water Utility Commission Annual Report. -5- Projected capital projects for existing system improvements in FY 2007-08 include equipping a new well, electrical upgrades to an existing well, completion of the design of a 2.2 million gallon reservoir, drainage improvements at an existing booster station, completion of water main projects already in progress and construction of a water main replacement project, machinery, equipment and vehicles. In addition $1,600,000 has been set aside to help fund the construction of the Municipal Operations Center. Projected debt service will decrease resulting from refinancing existing bonds with the 2007 Bond Refunding Issue. The Utility's portion of the net present value of the savings realized from this refinancing is estimated at $926,800. This savings has been a significant factor in minimizing the proposed increases to the water rates. Projected expenditures in the Enterprise Fund are proposed to be funded with revenue generated from water rates, fees, charges, cash reserves and interest income. ALTERNATIVE WATER RESOURCE DEVELOPMENT IMPACT FEE FUND REVENUE The Alternative Water Resource Development Impact Fee Fund (AWRDIF) is projected to have a cash balance of $1 million at the beginning of FY 2006-07. Pursuant to Ordinance No. (0) 96-43, AWRDIF funds may be used for capital expenditures related to alternative water resources including reclaimed water and CAP water. The revenue sources for the AWRDIF Fund are from impact fees collected when a water meter is purchased and from interest earned on cash balances. The Groundwater Preservation Fees (GPF) collected through the J Enterprise Fund are transferred to the AWRDIF Fund to help repay outstanding debt. The following table provides the budgeted revenue compared to the estimated revenue for FY 2006-07: Revenue Source FY 2006-2007 Budget FY 2006-2007 Estimated Difference Increase(Decrease) Impact Fees S 1539000 S 1519500 ($ 19500 ) GPF $ 8329300 $ 6819000 1519300 ) Interest Income $ 259000 $ 2439000 S 2189000 WIFA Grant $ 0 $ 359000 $ 359000 Transfer from Enterprise S 0 $ 194109000 $ 194109000 Total $ 190109300 $ 295209500 $ 195109200 Revenues were projected for FY 2007-08 were based on anticipated annual growth in the customer base of 320 new connections or 400 Equivalent Dwelling Units (EDUs). An EDU is equivalent to one single family residence. For impact fee projections, the Utility converts the estimated new connections to EDUs at a ratio of 1.25 EDUs to 1 new connection based on ten year historical trends. To be conservative, the GPF is assumed to increase based on the water use of 320 new single family residences. -6- The following table indicates the amount of impact fee revenue and GPF that would be realized with no impact fee or GPF increases: FY 2006-2007 Revenue Estimate FY 2007-2008 Revenue Projection Difference Increase(Decrease) $8329500 $9269021 $ 939521 REVENUE REQUIREMENTS The AWRDIF Fund was allocated a portion of the Series 2003 Bond proceeds to finance construction for the first phase of the reclaimed water system. The second phase of the reclaimed water system will be financed in FY 2007-08 by a loan through the Water Infrastructure Finance Authority of Arizona (WIFA). It is proposed that the acquisition of 3,557 AF of CAP water rights in FY 2007-08 will be funded through the AWRDIF Fund. This additional water will be necessary to meet the demands of future customers and as such will be paid from this Fund. The following table is a comparative summary of expenditures for the AWRDIF Fund. Budgeted amounts for FY 2006-07 are compared to the projected expenses for FY 2007-08 used in the financial analysis: Expenditures FY 2006-2007 Budget FY 2007-2008 Projections Change Increase(Decrease) Professional Services S 479500 S 359500 (S 129000 ) Capital Improvements $597939950 $596509000 (S 1439950 ) Debt Service S 8789542 S 195779118 S 6989576 Total $697199992 $ 792629618 $ 5429626 The professional services are expenses incurred for renewable water studies including the Lower Santa Cruz Managed Recharge Project and the CAP water pilot study for treatment techniques (slow sand filtration and reverse osmosis). The projected decrease in expenditures is a result of moving the Big Wash and Canada Del Oro recharge project to the Enterprise Fund. This was done because natural recharge is more appropriately studied under the Water Resource Management Program within the Enterprise Fund. The capital improvements in FY 2006-07 represent the design and construction of the second phase of the reclaimed water system. The project will not be constructed within FY 2006-07 therefore the costs will be carried forward into FY 2007-08. The increase in debt service is attributed to the Utility incurring additional debt to finance the second phase of the reclaimed water system. The repayment schedule for phase one was provided by the bond underwriters. The repayment schedule for the phase two WIFA loan was estimated by Utility Staff. -7- Projected expenditures in the AWRDIF Fund are proposed to be funded with WIFA loan proceeds, revenue generated from impact fees, groundwater preservation fees and interest income. POTABLE WATER SYSTEM DEVELOPMENT IMPACT FEE FUND J REVENUE The Potable Water System Development Impact Fee Fund (PWSDIF) is projected to have a cash balance of $9.8 million at the beginning of FY 2007-08. The PWSDIF Fund was ^� allocated a portion of the Series 2003 Bond proceeds to finance construction of growth - related potable water system improvements and the refinancing of the Series 2000 Bond issue. Revisions to the capital improvement plan have left sufficient bond proceeds available to construct the needed improvements from FY 2007-08 through FY 2008-09. Improvements after this time will be paid for with cash. The revenue sources for the PWSDIF Fund are from impact fees collected when a water J meter is purchased and from interest earned on cash balances. The following table provides the budgeted revenue compared to the estimated revenue for FY 2006-07: 1 Revenue Source FY 2006-2007 Budget FY 2006-2007 Estimated Difference Increase(Decrease) Impact Fees S 190849700 S 9529200 (S 1329500 ) Interest Income S 259000 $ 4119000 S 3869000 Total $ 191099700 $ 193639200 $ 2539500 Revenues were projected for FY 2007-08 based on anticipated annual growth in the customer base of 320 new connections or 400 Equivalent Dwelling Units (EDUs). An EDU is equivalent to one single family residence. For impact fee projections, the Utility converts the estimated new connections to EDUs at a ratio of 1.25 EDUs to 1 new connection base on ten year historical trends. The following table indicates the amount of impact fee revenue that would be realized with no impact fee increases: FY 2006-2007 Revenue Estimate FY 2007-2008 Revenue Projection Difference Increase(Decrease) $ 952,200 $ 947,500 ($ 49700) REVENUE REQUIREMENTS Growth -related potable water system improvements are managed through the PWSDIF Fund. These improvements include new potable water reservoirs, pump stations, water mains and wells that are required to meet the demands of new customers. The following table is a comparative summary of expenditures for the PWSDIF Fund. d. Budgeted amounts for FY 2006-07 are compared to the projected expenses for FY 2007-08 used in the financial analysis: -8- Expenditures FY 2006-2007 Budget FY 2007-2008 Projections Change Increase(Decrease) Capital Improvements $ 290159000 $ 195709000 ($ 4459000 ) Debt Service $ 6339794 $ 6319920 ( $ 19874 ) Total $ 296489794 $ 292019920 ($ 4469874 ) The capital improvements for FY 2007-08 include a 500,000 gallon reservoir and the related water main. This reservoir will provide fire flow capacity and peak day demands for future customers in the Stone Canyon service area. The debt service payments are pursuant to the repayment schedule provided by the bond underwriters. Projected expenditures in the PWSDIF Fund are proposed to be funded with cash reserves, revenue generated from impact fees and interest income. PREFERRED FINANCIAL SCENARIO Prior to developing financial forecasts, financial considerations were evaluated relating to significant short and long term capital expenditures, the Utility's existing cash reserves, existing outstanding debt, proposed future debt and the related debt service payments. To arrive at a Preferred Financial Scenario, the goals of the Commission were to ensure that all existing rate setting policies were met, cash reserves were utilized to minimize future debt and proposed rate increases would not result in rate shock. The Commission's finance subcommittee and Utility Staff evaluated numerous financial scenarios prior to forwarding a recommendation to the Commission. With regard to the Preferred Financial Scenario, the following are key assumptions used to develop the financial projections. The entire set of assumptions may be found in Appendix Be • Annual growth is estimated at 320 new connections annually which equates to 400 EDUs. • The Utility will use cash reserves to fund existing system capital improvements in FY 2007-08. • The Utility will finance future existing system capital improvements beginning in FY 2008-09. • The Utility will not need to finance future growth related capital improvements if the proposed impact fees are adopted. • The El Conquistador Golf Courses (36 holes) will be removed from groundwater in July 2008. • Debt service for CAP water development begins in FY 2010-11. Annual debt service of $3.9 million is based on approximately $60 million which includes the project construction costs, debt service reserve and bond issuance costs. • Funds have been set aside to help reduce the amount that would be financed to construct the Municipal Operations Center. The amount of $1,600,000 has been included as a capital expenditure in FY 2007-08 to account for the "set aside". • Debt service for the Municipal Operations Center begins in FY 08-09. • Projected operating costs in FY 2007-08 are the same as the Utility's budget request. Future years include 3 % annual inflation after one time expenditures have been deducted. • The Potable Water System Development Impact Fee is proposed to increase by $793, from $1,774 to $2,567 for a 5/8" water meter. The proposed fees increase based on meter size and user classification. • The Alternative Water Resource Development Impact Fee is proposed to increase by $1,771, from $300 to $2,061 for a 5/8" water meter. This increase would represent the first of three incremental increases. The subsequent increases would occur in the next two years as follows: in FY 2008-09 an increase of $1,560, from $2,061 to $3,621 and in FY 2009-10 an increase of $1,561 from $3,621 to $5,182. The proposed fees increase based on meter size and user classification. Analysis of the Preferred Financial Scenario indicates that the Enterprise Fund can utilize cash reserves to finance the proposed existing system capital improvements for FY 2007-08 but will need to finance future improvements. When the Utility assumes more debt, the water rates must increase in order to maintain the minimum debt service coverage requirement of 1.30. The Preferred Financial Scenario proposes new debt for the Enterprise Fund in FY 2008-09 and FY 2009-10. The projected rate increases begin in FY 2008-09 at 3% followed by 6%, 8% and 12% for the following three years. The capital costs to construct the CAP water delivery system will be funded with revenue derived from Groundwater Preservations Fees and Alternative Water Resource Development Impact Fees. However, an analysis will need to be performed to identify operating and maintenance costs that direct delivery of CAP water will have on ratepayers. The financial projections detailed in the Preferred Financial Scenario for the AWRDIF Fund include assumptions that the second phase of the reclaimed water system will be constructed in FY 2007-08 and will be financed with a loan from the Water Infrastructure Finance Authority of Arizona (WIFA). It is also assumed that repayment of capital costs for the reallocation of 3,557 AF of CAP water will be funded through the AWRDIF Fund. Payments for the reallocation begin in FY 2007-08 and continue for the next four years. Construction of the CAP water delivery system will be managed through the AWRDIF Fund. It is estimated that debt service for this project will begin in FY 2010-11. To meet the revenue requirements of this Fund, it has been assumed that the Groundwater Preservation Fees will increase annually for the five year projection period and that the Alternative Water Resource Development Impact Fees will increase over a three year period beginning in FY 2007-08 as proposed in the AWRDIF Analysis completed by Red Oak Consulting. The financial projections detailed in the Preferred Financial Scenario for the PWSDIF Fund include assumptions for growth related capital improvements as detailed in the Potable Water System Master Plan adopted by the Town Council in 2006. Projects have been delayed over the last several years for reasons beyond the Utility's control. As such, there -10- are 2003 bond proceeds remaining to fund the capital improvements for FY 2007-08 and FY 2008-09. It has been assumed that the Potable Water System Development Impact Fees will be increased in FY 2007-08 as proposed in the PWSDIF Analysis completed by Red Oak Consulting. Given this assumption, all future capital improvements will be financed with cash reserves. The projections for the Enterprise Fund, AWRDIF Fund and the PWSDIF Fund were combined to evaluate the overall debt service coverage and total cash balances at the end of each fiscal year. Analysis indicates that, under the Preferred Financial Scenario, the Utility will meet the debt service coverage requirement established by the Mayor and Council Water Polices and the Series 2003 Bond Covenants for all five years. Proformas for the Preferred Financial Scenario may be found in Appendix C. RECOMMENDATION ON WATER RATES, FEES & CHARGES After reviewing the analysis of the three Funds and their respective revenue requirements for the next five years, the Water Utility Commission is recommending: • The base rates remain the same for both the potable and reclaimed water rates with the exception of the 8 inch meter. The base rate for the 8 inch meter is proposed to decrease from $1,325.00 to $1,060.00. This reduction will result in conformance of base rates generally accepted rate setting practices. • Restructure the existing 3-Tier rate design to a 4-Tier rate design for the potable water rates. • The commodity rates for the existing 3 tiers remain the same for the potable water rates. • Establish the Tier 4 commodity rate at $5.00 per 1,000 gallons. • The water use contained within each tier is proposed to decrease to further encourage water conservation. • The commodity rates for reclaimed water remain the same with all water use charged at the same rate. • The construction water rate will increase from $4.76 to $6.00 per 1,000 gallons and will be $1.00 greater than the highest tiered rate. • Increase the Groundwater Preservation Fee by $0.15, from $0.25 to $0.40 per 1,000 gallons for the potable water customers. • Increase the Groundwater Preservation Fee by $0.04, from $0.21 to $0.25 per 1,000 gallons for the reclaimed water customers. The proposed reduction in water use contained in each tier will be phased in to conform with generally accepted rate setting practices. This will minimize the impact to customers with larger water meters. Additionally, the proposed change to the 4-Tier commodity rate structure is an effort to further encourage water conservation. Given the extended drought that the southwest has been experiencing, the Commission's recommendation on water rates is an important conservation message. In order to minimize the increase in their water bills, customers will have to reduce the amount of water used in a month. The base rate for an 8 -11- inch meter will be decreased to bring that specific base rate into conformance with generally accepted rate setting practices. Base rates for the other meter sizes already conform to these principles and are not proposed to change. There are no proposed increases to the commodity rates for the first 3 tiers. The commodity rate for the fourth tier will be established at $5.00 per 1,000 gallons of water used. The actual percent increase each customer experiences will depend on how much water they use. The proposed increase in the Groundwater Preservation Fees (GPF) will help repay the debt on the reclaimed water system, the capital charges associated with the reallocation of 3,557 AF of CAP water and ultimately, repay the debt for the costs to construct the CAP water delivery system. It is proposed that the GPF be increased gradually over a five year period. In keeping with the Town Council's direction last year, the reclaimed water customers will pay a reduced rate for the GPF. The following table illustrates the proposed water rate changes for a single family residential customer with a 5/8" x 3/4"water meter. Other water providers in the region are included for comparison. Water Provider Monthly Base Rate Tier 1 Cost Per 1,000 Gals. Tier 2 Cost Per 1,000 Gals. Tier 3 Cost Per 1,000 Gals. Tier 4 Cost Per 1,000 Gals. Oro Valley Current 13.25 2.08 2.81 3.76 N/A Oro Valley Proposed 13.25 2.08 2.81 3.76 5.00 Metro Water 12.94 2.06 3.23 4.07 5.42 Marana Water 14.00 2.15 3.00 3.90 4.80 Tucson Water 5.35 1.47 5.12 7.18 10.05 Oro Valley Water, Tucson Water and Metro Water no longer include water usage in their base rates; however, Marana Water includes 1,000 gallons. Oro Valley, Metro and Marana all base their rates on 1,000 gallons. Tucson Water's commodity rates are based on the use of 100 cubic feet which is the equivalent of 748 gallons. To simplify the comparison, the rates for Tucson Water have been converted to represent the charge for 1,000 gallons. A table providing proposed rates for all Oro Valley Water Utility meter sizes may be found in Appendix D. Appendix D also contains tables that calculate the dollar increase and the percentage increase that a customer would experience on a monthly bill under the proposed rates. Monthly bill amounts are calculated in 1,000 gallon increments for the 5/8" x 3/4" meters and a variety of increments for larger meter sizes. For comparison purposes, the following table provides a calculation of a monthly bill amount for a single family residential customer with a 5/8" x 3/4" meter for the water utilities surrounding the Oro Valley Water Utility service area. Direct comparison of raw base rates and commodity rates is less effective because of the varying rate structures of each utility. A better comparison is to calculate the cost for specific consumption levels during a summer month. Please note that these charges only reflect water use fees and specifically - 12- exclude taxes, Groundwater Preservation Fees and similar renewable water resource fees charged by other water providers. Water Utility Cost for 7,000 Gallons Cost for 10,000 Gallons Cost for 25,000 Gallons Cost for 40,000 Gallons Oro Valley - Current 27.81 34.05 76.20 132.60 Oro Valle - Proposed 27.81 36.24 86.94 153.26 Metro Water 27.36 33.54 83.85 155.70 Marana Water 26.90 33.35 82.85 150.35 Tucson Water 15.65 20.06 97.48 223.15 A typical single family residential customer averages 10,000 gallons of water per month over the course of one year. Based on this water use, they would experience an increase of $2.19 per month for water used and an increase of $1.50 for Groundwater Preservation Fees. The total monthly increase for 10,000 gallons of water used in a month would be $3.69. Each individual customer's percent increase will depend on the volume of water they use. Tables that calculate the dollar increase and the percentage increase that a customer would experience on a monthly bill under the proposed rates may be found in Appendix D. No other adjustments to service fees and charges are necessary at this time; however, the Commission recommends that the service fees and charges continue to be reviewed on an annual basis. ALTERNATE FINANCIAL SCENARIO Appendix E presents an Alternate Financial Scenario to allow for a comparison with the Preferred Financial Scenario. Both scenarios used identical assumptions for growth, operating costs and debt service. The difference between the two scenarios is the rate structure that will generate the needed revenue. The Preferred Financial Scenario contains a 4-Tier rate structure to strengthen the conservation message and to phase -in conformance to generally accepted rate setting practices. The Alternate Financial Scenario contains the existing 3 -Tier rate structure with no changes in the water use contained in each tier. Comparison of the two scenarios reveals that future rate increases must be greater when using the 3-Tier rate structure versus the 4-Tier rate structure. The Commission is recommending no increase in the existing base rates or the existing commodity rates this year. However, in future years, the projected increases for the Preferred Financial Scenario would be 3 %, 6%, 8% and 12% over the next four years. The projected increases for the Alternate Financial Scenario would be 4%, 8%, 10% and 12% over the next four years. The revenue projections for both scenarios were conservative to allow for potential water conservation. - 13 - APPENDIX A Opinion on Rates Analysis Red Oak Consulting P A T H W A Y S T O L A S T I N G S 0 L U T 1 0 N S • RE BDAK • 00 • CONSULTING A DIVISION OF MALCOLM PIRNIE May 9, 2007 Mr. Philip Saletta, PE Water Utility Director Oro Valley Water Utility 11000 N. La Canada Dr. Oro Valley, AZ 85737 Re: Independent Review of Internal Rate Study Dear Mr. Saletta: Red Oak Consulting (Red Oak) is providing this letter to summarize our review of the Oro Valley Water Utility's (the Utility) internal rate study. The Utility provided two cash flow forecasts for our review (Scenario E and Scenario G) which are attached to this letter in their original form. The forecasts include proposed rate increases and rate structure changes. We understand that the Utility intends to present the forecasts and proposed rates to the Town Council as the "Preferred Scenario" (Scenario E) and "Alternate Scenario" (Scenario G). The forecasts will not be used for the purpose of issuing additional debt nor will they be included in any Official Statement or used to support any financing. JGENERAL Red Oak reviewed the accompanying forecasted cash flows of the Utility for the fiscal years (FY) ending June 30, 2008 through June 30, 2012 (the Forecast Period). Our review included the following areas: J• Assumptions underlying the analysis and consistency of the analysis with underlying assumptions. 0 Revenues from proposed rates. 0 Comparison of projected results with results presented in the Comprehensive Annual Financial Reports for FY ending June 30, 2003, 2004, 2005 and 2006. 0 Ability of the projected results to meet Utility bond covenant requirements. • Ability of the projected results to meet Resolution No. (R) 05-09, Mayor and Town Council Water Policies. • Ability of proposed rate structure to meet generally accepted rate setting practices. The forecasts provide for the financing of improvements to the Utility in accordance with the Capital Improvement Program (the "CIP"). The forecasted cash flows illustrate the operating costs, working capital needs and other financial requirements of the Utility, including the debt service requirements associated with the Utility's Series 1996, 1999, 2001, 2003, 2005 • 100 Fillmore Street, Suite 200 • Denver, CO 80206 • T 303-316-6500 F 303-316-6599 • www.redoakconsulting.com Mr. Philip Saletta, P.E. Oro Valley Water Utility May 9, 2007 Page 2of3 and 2007 Series Bonds and additional Bonds to be issued by the Utility during the Forecast Period. The estimated bond financing required for the Forecast Period includes any and all such costs related to the improvements and the costs of issuance. Debt service on the anticipated senior lien bonds is to be paid from revenues of the Utility. The accompanying forecasted cash flows are based upon numerous assumptions made by Utility management. Our review included analysis of the records and reports of the Utility and inquiries of management regarding the assumptions employed in developing the accompanying forecasted cash flows. The forecasted cash flows reflect the Utility's expectations, based on present circumstances, of future conditions and their expected course of action. Statements of financial position and results of operations are not presented as part of this forecast. The significant assumptions used in each cash flow forecast scenario are summarized for each scenario in the accompanying "SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS". These assumptions are integral and essential to an understanding of the financial forecast. Changes in these assumptions could materially affect the findings of our review. Additionally, changes to the CIP used in the cash flow forecast, including the costs of existing projects, may affect the annual debt service requirements projected in future years. EXCEPTIONS Resolution No. (R) 05-09, "Town of Oro Valley Mayor and Town Council Water Policies" states that "An annual average debt service coverage of 1.3 times or 130% shall be maintained". While this document does not provide specific definition of debt service coverage, it is Red Oak's understanding that this means Net Revenues (as defined in the Series 2003 Bonds) in each Fiscal Year equal at least to 13 0% of the interest and principal for all outstanding obligations, both senior and junior. ADDITIONAL COMMENTS It is important to note the relationship between the Utility's consumption blocks and the forecasted cash flows. The American Water Works Association MI Manual of Water Supply Practices "Principles of Water Rates, Fees, and Charges" acknowledges that "no standard number or size of the blocks exists, nor is there a standard for how steeply the unit charges for each of the blocks increase." Generally, however, increasing block consumption thresholds change in proportion to the customer's meter capacity, expected consumption, or other verifiable standard. Red Oak recommends that over time the Utility adjust its block i P A T H W A Y S T O L A S T I N G S O L U T I O N S ®� s 0 • d • • o Mr. Philip Saletta, P.E. Oro Valley Water Utility May 9, 2007 Page 3 of 3 consumption thresholds (i.e., tiers) by meter size to reflect a proportionate relationship with the meter capacity ratio, or other standard, as appropriate. Adjusting block consumption thresholds may have a material positive or negative effect on future revenues. Red Oak understands the Utility is evaluating additional scenarios that phase -in proportionate block tiers, resulting in revenue adjustments in FY 2009-10 through FY 2011-12 when compared to the scenarios attached herewith. OPINION In our opinion, with the exception of the items listed above, the Utility's proposed rate structure meets generally accepted rate setting practices. Further, the accompanying forecasts by Utility management and the underlying assumptions provide a reasonable basis for the Utility's projections during the Forecast Period. However, there will usually be differences between the forecasted and actual results because events and circumstances frequently do not occur as expected and those differences may be material. Because of this, management should update the forecast and its financial management plan on an annual basis or when substantial changes in significant underlying assumptions occur, whichever is more frequent. We have no responsibility to update this report for events and circumstances occurring after the date of this report. Very truly yours, 1 RED OAK CONSULTING J A Division of Malcolm Pirnie, Inc. J 1 Gallagher 1 Principal Consultant II J JAttachments: 4 P A T H W A Y S T O L A S T I N G S 0 L U T 1 0 N S 1 APPENDIX B Assumptions for Preferred Financial Scenario B-1 Enterprise Fund � B-3 Alternative Water Resource Development Impact Fee Fund B-4 Potable Water System Development Impact Fee Fund PREFERRED FINANCIAL SCENARIO E-R2 ASSUMPTIONS FOR ENTERPRISE FUND Growth 320 new connections for water rates, 400 EDUs for impact fees (320 x 1.25 = 400) (based on Homebuilding Forecast by John Strobeck, Bright Future Business Consultants) Water Rate Structure 4 Tiers (refer to Proposed Rate Structure) Water Rate Increases 0%, 3%, 5%, 7% and 9% (same increases in base & commodity rates) Construction Water Rate $1.00 more than Tier 4 in each year Potable GPF Increases $0.40, $0.601,$0.80, $1.00 & 1.50 per 1,000 gallons Reclaimed GPF Increases $0.25, $0.30, $0.40, $0.50 & $0.50 per 1,000 gallons Reclaimed GPF to remain at $0.50 in all future years Water Use Trends Used same water use trends as those in CY 2006 Other Revenue Based on FY 07-08 proposed budget. Did not project increases as misc. charges fluctuate (NSF fees, reconnect fees, sewer billing, plan review, etc.) Beginning Cash Balance Refer to worksheet. Cash will increase based on 2007 Bond Refunding (projections by Stone & Youngberg) Interest Income Based on 4.3 6% (refer to Interest Income Worksheets) Personnel Costs Based on Utility's proposed budget for FY 07-08, Added 1 new FTE in FY 08-09, Annual increases of 3% COLA & 3% Merit all years Potable O&M Based on Utility's proposed budget for FY 07-08; 3% inflation for FY 08-09 plus 10% increase in power; 3 % inflation of all remaining years. Reclaimed O&M Based on Utility's proposed budget for FY 07-08; FY 08-09 begin serving El Con G.C. with reclaimed, water purchased increases by 1,000 AF, other costs increase by 3% annually. CAP Capital Costs Based on 10,305 AF at rate schedule approved by CAP 6/22/06. CAP Recharge Costs Based on 2,500 AF at rate schedule approved by CAP 6/22/06. CAGRD Costs Based on S. Seng worksheet and rate schedule approved by CAP 6/22/06. ma 9 ASSUMPTIONS FOR ENTERPRISE FUND (continued) Debt Service P&I debt service for 1996-2003 bonds taken from amortization schedules provided by Stone &Youngberg (S&Y). P&I debt savings for 2007 Refunding taken from schedules provided by S&Y. P&I debt service for 2003 Sr. Lien Bonds taken from amortization schedules provided by S&Y. P&I debt service for 2005 Excise Tax Bonds taken from amortization schedule provided by S&Y. P&I debt service for proposed 2008 Excise Tax Bonds is an estimated annual payment for the Water Utility's portion of the Municipal Operations Center. Information was provided by Stacey Lemos, Finance Director. P&I debt service for proposed 2008 Sr. Lien Bonds was estimated by S. Seng using $10,500,000 at 6.0% for 20 years. Debt Service Coverage Established at 1.30 by Mayor & Council Water Policies Capital Improvements projects are identified in 5-Year CIP and PWSMP, CIP in FY 07-08 includes $1,600,000 for the Municipal Operations Center. PREFERRED FINANCIAL SCENARIO E-R2 ASSUMPTIONS FOR AWRDIF FUND Growth 320 new connections for water rates, 400 EDUs for impact fees (320 x 1.25 = 400) (based on Homebuilding Forecast by John Strobeck, Bright Future Business Consultants) AWRD Impact Fees Increase to $5,182 per EDU effective 10/ 1 /07, phase -in over 3 years Revenue FY 07-08 revenue derived from 100 EDUs at $300 plus 300 EDUs at $2,061 FY 08-09 revenue derived from 100 EDUs at $2,061 plus 300 EDUs at $3,621 FY 09-10 revenue derived from 100 EDUs at $3,621 plus 300 EDUs at $5,182 FY 10-11 & FY 11-12 revenue derived from 400 EDUs at $5,182 Potable GPF Increases $0.40, $0.60, $0.80, $1.00 & 1.50 per 1,000 gallons Reclaimed GPF Increases $0.25, $0.30, $0.40, $0.50 & $0.50 per 1,000 gallons Reclaimed GPF to remain at $0.50 in all future years Water Use Trends Used same water use trends as those in CY 2006 Beginning Cash Balance Refer to worksheet. Cash will increase based on 2007 Bond Refunding (projections by Stone & Youngberg) Interest Income Based on 4.3 6% (refer to Interest Income Worksheets) Debt Service P&I debt service for 2003 bonds (reclaimed phase 1) taken from amortization schedules provided by Stone & Youngberg (S&Y). P&I debt service for 2007 WIFA loan (reclaimed phase 2) estimated by S. Seng using $6,000,000 at 3.8% over 20 years. P&I debt service for CAP project estimated by S. Seng using $60,831,951 at 5 % for 30 years. Amount includes project costs of $56,370,385, debt service reserve of $3,897,408 and issuance costs of $563,708. Debt service for reallocation of 3,557 AF of CAP water was estimated by CAWCD Reclaimed Capital Improvements Projects are identified in 5-Year CIP. H 1 APPENDIX C Preferred Financial Scenario J C-1 Enterprise Fund C-3 Alternative Water Resource Development Impact Fee Fund C-4 Potable Water System Development Impact Fee Fund C-5 Summary of All Funds v O N LL r r O CD N LL O CD O O LL c) 00 O N LL Do O O N LL N E co ti .a O O O N Lo Mvca G m ova L O L O a. a. 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O O 0 0 Lf) M cr M M M Ln N O d• LO 17' O �- N T- d• r- CO co d T M O (7) 41 N f` O O CO r- IT LO 00 1` O LO LO I` LO O T- r N 00 rl- 1` 00 1` CD T 00 CD Q) >- N v CD O M C 1` 00 r LL r- T T N T 69. 69 69 69 69 69 O O Cfl LO � O N M I` N O O O O N N d' d' 00 U( O O r- d' r M � O O LO 00 I` N ti N � � � N M 00 LO M O d' 00 O O 00 t` O O O 00 O qT M T CO O N O 0')00 I` � LO U') CO ' LO N M' Ln 'd' Cl M CD W) 1 W O 00 � CO I` V- CD O I ' V- Cfl Cfl Ln Lf) d' CD � I` 1 N Ln 00 M oc CD Ci! N I� 00 mot' Lf) CO N T- O 41 N T--(D T- `d' N CD r- 00 LO 00 d C'M NT le00 t- o 'L w > LL CO 0 O �- 1` CM 00 CV I r 00 'd� T O O O O 00 d' 00 T O O N O N M It 00 1` 00 N Ln 00 C; T C CL) V C � 6? 69 69 69 69 69 LL L) - C M v 'd' 00 CO O CO 0')I` O O O Cfl Ln Ln d' CD 'd' O O 00 O O O O O d' O co 'd' 00 NU) O LO LO O O O M CM LO 00 d' LA 00 00 d' N LC) cc 00 00 00 Cfl 00 lt' co I` CO O 00 IT d' CD CD LO T- V LO Cn ' L() (.0' CD N qq O f� O I` P' vt N T O CO N L!) 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N 0M E ++ 0 o m 00 ocn N •� co LO CO N J >+ 0 G) a, c o CDcn cn cn m v 64 � CD CD CD Q) .0 N -0 -0 NO E 0 Cn >i 0 � c c N 0 a r- c�j �� cn> 0 � m CO a o X °m m mmcnZ-�-a - >1 tQ cnC: J. L D J Cc M d .0 � x M L x x � O 8 N N Q O ca IZ cnCnWCnU)W W0aofL)Z� m a s 06 0 a 060676 0 0 Z cc a.ma-aaai-0amai-H N O O O O O r O O O O O O O O ' O N N 000 O co O L() L() LL _ 69 00 O O O O O O O _O CD000 N O CIO O O LO r >. N LL C{} 0 O O O O O N 1 O O O O O O O ' O W O CDO O N O LO •Ri L L O 0) CD N v cn 69 LL V G O O O O O O O O w = 00 CD O ' o O LL N 000 O C'7 LO Qi L LL L E L m 69 cn a co I O O O d• O CD O O O ti O O LO Ln Co O O O ' L ') 00 N f` Co d- O O LO 00 LPL 69 69 O N o O 'CO O O (D 1` d 00 �- r- O r- O Ln LLB N Co 00 co ' C0 > 000 Lc') Ile O 69� 6F? 69 69 O M o T- Lf) o O O w w 00 f` O O (D LO m L9 co N ' Co CD ' ..� O O O ER 69 09- 69 .-. C co 'N O O CA co C."! CD 00 co N m Cli W r. r- N co cM I'-- 00 O ti 1` t 6Fi 69 69 69 O m o m M o O � (fl m f` 0 O f-� c0 0 N C) co N 00 tD r- Ln r N CN 69 69- 69 IT O O O co m O O O P• r O LC) N 'IT O 61% 6% 69 69 m o '> o v CO a) X U a) U_ Z c U U) N N O � Q � O 0 H Z O M M N N CY) N CD CI c ' f` O o N N M CY) 000 O r 0) CD O) T- a c c 69� O) O 6fi O T-- d' M L 69 O 00 N cY CC ' a O o 1` M O r N N M C, a N O M O r 69 00 r 69 CV 69 O o O N W) M LO r qr-: N O LO 0) CY)O C� C ' a 6 T, N O CY � r CA O 69 0c0 CA bg N d' 00 69 1�- O) 0 ' CN O me CDW) ti r O fl- n CC N O co ER O O N 69 0) LO N 69 N LO O M C ' C o 00 co N d• d• T-- 0')(D C Lr. 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Z Z C) E O0 +co U� Q mQ O L• U) L C M .�_ C1 U O _ co L C •� 4a) > N •= 8i ._ aM p W <.i m o � O L Cu .0 O X x N L � c, Q�ww��g CCi m i-, d i E E E Cu 0 2 C) a.� O L _ � == L 'a�'> =,,v Q °�'� >� 'o N L Oaa0" ♦+ O 2 z d a 0 c) 0 i (D � a) w� G> a a) m O 0= mcnt)zw C CU O LU<0 - L m at) C-6 1 APPENDIX D Preferred Financial Scenario 1 Rate Schedules & Tables for Bill Comparisons J D-1 Potable Water Rates D-2 Reclaimed Water Rates D-3 Tables for Bill Comparisons by Meter Size Cl) LU a N Lu = U v/ L r Q •O LU F`' Q W Cl) a W— F o g -V ' 5 w i- w J c Q m W = W J cn w F' J Cl) LL m a> W Q li4a O ,r� a O L m a J F- O 0 >- w J lC5 IQ 0 0 0 0 0 6 0 0 0 o 0 o 0 0 0 0 0 0 0 a 0 W o O O a U a J Q z Q � � � W Q Q Q Q Q Q Q Q Q O = C p Of Z Z Z Z Z Z Z Z Z (-)0 LJ U U) Q M 100 Ito Ito Ito iw Ito O ti t` w r` cp t` r� r� to r` t` to ti a 2 w o 0 2 H M M M M M M M M M O a U a F-- J Q Q M W CD (C) O O O O O (C) CC) CC) p0 M ('7 M M co co co co c" M 00 Lu ui w �= a cn Q N 0 O o ix o r w r co r 00 r 00 r ww r r co r 00 r 00 a. 2 W c 0 E � N N N N N N N N N 0 a U a F- ~_ Q O N W o w O M 0O W M W M M M W Q2 p U LU Uo ui LJ ~ a Cl) r (� O O W O co 00 co 00 00 00 co 00 co a2Lu o000000000 0 a� CD N N N N N N N N N O a U a lz 0 7— OC� O W o w 0 w 0 m 0 w 0 w 0 w 0 w 0 w 0 w 0 p N N N N N N N N N UO LU U)Ul) Lu 0 N 0 a) M 0 O M 0 M W 0 0 W 0 0 N 0 0 N l(D 0 0 M 0 0 O MM O o r r M W O r r N M M W W O a Lu °wad am C U W N o O 0 O 0 M 0 0 IN 0 0 0 0 0 0 IN 0 0 ZF- M O M CC) CC) N lcv,) N I(C) m 6 W g� O r- M CC) o � CO CC) CO � W Q Q � U m 0 C W W F- N loo M X 1"t M X r LO N Mqqt W 00 LL! 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Did not project increases as misc. charges fluctuate (NSF fees, reconnect fees, sewer billing, plan review, etc.) Beginning Cash Balance Refer to worksheet. Cash will increase based on 2007 Bond Refunding (projections by Stone & Youngberg) Interest Income Based on 4.3 6% (refer to Interest Income Worksheets) Personnel Costs Based on Utility's proposed budget for FY 07-08, Added 1 new FTE in FY 08-09 Annual increases of 3 % COLA & 3 % Merit all years Potable O&M Based on Utility's proposed budget for FY 07-08; 3% inflation for FY 08-09 plus 10% increase in power; 3 % inflation of all remaining years. Reclaimed O&M Based on Utility's proposed budget for FY 07-08; FY 08-09 begin serving El Con G.C. with reclaimed, water purchased increases by 1,000 AF, other costs increase by 3 % annually. CAP Capital Costs Based on 10,305 AF at rate schedule approved by CAP 6/22/06. CAP Recharge Costs Based on 2,500 AF at rate schedule approved by CAP 6/22/06. CAGRD Costs Based on S. Seng worksheet and rate schedule approved by CAP 6/22/06. E-1 J ASSUMPTIONS FOR ENTERPRISE FUND (continued) Debt Service P&I debt service for 1996-2003 bonds taken from amortization schedules provided by Stone &Youngberg (S&Y). P&I debt savings for 2007 Refunding taken from schedules provided by S&Y. P&I debt service for 2003 Sr. Lien Bonds taken from amortization schedules provided by S&Y. P&I debt service for 2005 Excise Tax Bonds taken from amortization schedule provided by S &Y. P&I debt service for the proposed 2008 Excise Tax Bonds is an estimated annual payment for the Water Utility's portion of the Municipal Operations Center. Information provided by Stacey Lemos, Finance Director. P&I debt service for proposed 2008 Sr. Lien Bonds was estimated by S. Seng using $10,500,000 at 6.0% for 20 years. Debt Service Coverage Established at 1.30 by Mayor & Council Water Policies Capital Improvements Projects are identified in 5-Year CIP and PWSMP, CIP in FY 07-08 includes $1,600,000 for the Municipal Operations Center. J E-2 ALTERNATE FINANCIAL SCENARIO G-RI ASSUMPTIONS FOR AWRDIF FUND Growth: 320 new connections for water rates, 400 EDUs for impact fees (320 x 1.25 = 400) (based on Homebuilding Forecast by John Strobeck, Bright Future Business Consultants) AWRD Impact Fees Increase to $5,182 per EDU effective 10/1/07, phase -in over 3 years Revenue FY 07-08 revenue derived from 100 EDUs at $300 plus 300 EDUs at $2,061 FY 08-09 revenue derived from 100 EDUs at $2,061 plus 300 EDUs at $3,621 FY 09-10 revenue derived from 100 EDUs at $3,,621 plus 300 EDUs at $5,182 FY 10-11 & FY 11-12 revenue derived from 400 EDUs at $ 5,182 Potable GPF Increases $0.40, $0.60, $0.80, $1.00 & 1.50 per 1,000 gallons Reclaimed GPF Increases $0.25, $0.30, $0.40, $0.50 & $0.50 per 1,000 gallons Reclaimed GPF to remain at $0.50 in all future years Water Use Trend Used same water use trends as those in CY 2006 Beginning Cash Balance Refer to worksheet. Cash will increase based on 2007 Bond Refunding (projections by Stone &Youngberg) Interest Income Based on 4.36% (refer to Interest Income Worksheets) Debt Service: P&I debt service for 2003 bonds (reclaimed phase 1) taken from amortization schedules provided by Stone & Youngberg (S&Y) P&I debt service for 2007 WIFA loan (reclaimed phase 2) estimated by S. Seng using $6,000,000 at 3.8% over 20 years. P&I debt service for CAP project estimated by S. Seng using $60,83 1,951 at 5% for 30 years. Amount includes project costs of $56,370,385, debt service reserve of $3,897 408 and issuance costs of $563 708. Debt service for reallocation of 3,557 AF of CAP water was estimated by CAWCD Reclaimed Capital Improvements Projects are identified in 5-Year CIP. E-3 ALTERNATE FINANCIAL SCENARIO GR-1 ASSUMPTIONS FOR PWSDIF FUND Growth 320 new connections for water rates, 400 EDUs for impact fees (320 x 1.25 = 400) (based on Homebuilding Forecast by John Strobeck, Bright Future Business Consultants) PWSD Impact Fees Increase impact fees to $2,567 per EDU effective 10/01/07. Revenue FY 07-08 revenue derived from 100 EDUs at $1,774 plus 300 EDUs at $2,567 Revenue for all remaining years derived from 400 EDUs at $2,567. Series 2003 bonds are completely used by end of FY 08-09 Beginning Cash Balance Refer to worksheet. Cash will increase based on 2007 Bond Refunding (projections by Stone &Youngberg) Interest Income Based on 4.36% (refer to Interest Income Worksheets) Debt Service P&I debt service for 2003 bonds (expansion related projects) taken from amortization schedules provided by Stone &Youngberg (S&Y). No further financing is projected. Capital Improvements Capital projects (growth related) are identified in the PWSMP and the 5-Year CIP. 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